Fiscal cliff offers include switch to chained CPI

Retirees are bracing themselves for the strong possibility that a less generous COLA formula is part of deficit reduction.

It’s looking more likely that federal retirees will see changes to the formula used to determine their annual cost-of-living adjustments.

House Speaker John Boehner, R-Ohio, reportedly has been pushing for a deal on the fiscal cliff that includes a switch to the “chained CPI” formula to determine cost-of-living adjustments for federal retirees and Social Security beneficiaries. Several news outlets, including CNN, reported on Monday that Boehner’s latest offer included a proposal to use the less generous formula.

President Obama's counteroffer to Republicans on Monday night also included a switch to the chained CPI, according to reports.

COLAs currently are determined using a formula that takes into account increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers, but some experts argue that a chained CPI, which takes into account modifications in purchasing habits as prices change, provides a clearer understanding of inflation.

The result would be lower COLAs for retirees, including federal and military retirees, over time.

During the past few years, Obama reportedly has expressed support for switching to a chained CPI, at least in private deficit reduction talks. It also was considered by the joint congressional committee on deficit reduction, and endorsed by Simpson-Bowles.

This is how a 2010 memo from the nonpartisan Congressional Budget Office explains it: “The chained CPI grows more slowly than the traditional CPI does: by an average of 0.3 percentage points per year over the past decade. As a result, using that measure to index benefit programs and tax provisions would reduce federal spending (especially on Social Security and federal pensions) and increase revenues.”

And this is how a February article from the Center on Budget and Policy Priorities puts the issue into context: “Many of the federal government's retirement, disability and income-support programs -- including Social Security, federal civilian and military retirement, railroad retirement, [Supplemental Security Income], and veterans' compensation and pensions -- pay annual COLAs that are linked to the CPI.” The line was included under a subheading that read “Using Chained CPI Would Affect a Number of Programs and Save Significant Amounts.”

None of this is welcome news to retirees who already aren’t receiving an overly generous COLA in 2013. Federal retirees will receive a 1.7 percent cost-of-living adjustment in 2013, according to figures the Bureau of Labor Statistics released in October. And the COLA amount that recipients actually end up with is affected by Medicare Part B premiums, since those premiums are deducted from Social Security payments. The Centers for Medicare and Medicaid Services announced in November that the 2013 monthly premiums would increase 5 percent, so most retirees will end up with less than the 1.7 percent COLA.

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